Texas - why do oil companies lease small acreage?

I have been trying to figure out why oil companies lease small acreages? What is their advantage when the acreage is small and surrounding acreage can't be obtained to allow a well to be drilled in the area? How is this small acreage helping the oil companies?

I have read where companies have offered as much as $20,000.00 bonus plus royalties for a single acre. Why?

Any help would be appreciated

Tommie,

here are a few of my thoughts. By the way, were you offered $20,000/ac and trying to understand your good fortune? Or your neighbor was and you are trying to understand why you got gipped, or you've read stories of large lease numbers and you are holding out for the big score?.........lol.... anyway,

If they truly can't secure ANY acreage around them, then I agree with you; what's the point, no purpose. However, I doubt that would really be the case, that is, it is likely they have other properties either adjacent or nearby. In general, it is necessary for a company to hold the mineral rights for an entire drilling unit (DU). A drilling unit for unconventional shale is often 640 acres. If they have a majority (I don't know the specifics) of a DU they can force pool "holdouts" to lease and become part of the drilling unit. So that is why ALL acreage is generally needed.

Now regarding why $20,000 an acre. well it can occur but these lease amounts are rare. During the boom in Texas in 2008 some leaf amounts reached $27k if I remember right - but also many leases at that level collapsed/cancelled right along with the economy and were'n't paid.

So it isn't uncommon to see leases for $40 and up. These days, more likely to be $200 and up and if in a hot area then $1,500 - $3,500 per acre isn't unheard of. When to pull the trigger and lease is the question, do you accept $50, 200, 1,000 or wait, granted someday that mineral acreage might have $5,000/ac value. or you got bypassed and a well is near you and making your land/minerals - not needed. It is like playing poker kind of. but in this case you get to go to the Internet and ask questions and you get to drive down the road and ask your neighbor about going rates (what is everyone hearing).

One final point, why a lot of money for a single acre or small parcel? - this can happen if there is a mineral owner that doesn't want to lease and the lessee might offer them more to make the deal. On the other hand if they don't make the deal (at an although higher offer, not astronomical) then the lessee can force pool.

This doesn't matter whether in Texas - it applies universally.

Wilson

Tommie, if the operator doesn't lease your acre then someone else can and participate in the well and the operator would make nothing off your acre. At that point they probably wouldn't make any money at $27k for your acre, but they could well offer you $5k so they could make $22k off your acre. It's better than letting someone else make the $22k off your acre. I believe that operators offer large sums for house lots just to be done with them. The operator may not offer anyone $6k per acre but they may offer the owners of a 1/6 acre lots $1k to get them to sign because landmen have to be paid and the time they spend getting you to sign isn't free.


Thanks Wilson

Not even close to 20k - my offer is $150. I just couldn't figure out why they even want my 6 acres. Looks like they would lease the big partials and say the hell with messing with these little pieces. It makes sense, if they need a certain percentage of the 640 to be able to drill.

Thanks again for your help


Wilsontownship said:

Tommie,

here are a few of my thoughts. By the way, were you offered $20,000/ac and trying to understand your good fortune? Or your neighbor was and you are trying to understand why you got gipped, or you've read stories of large lease numbers and you are holding out for the big score?.........lol.... anyway,

If they truly can't secure ANY acreage around them, then I agree with you; what's the point, no purpose. However, I doubt that would really be the case, that is, it is likely they have other properties either adjacent or nearby. In general, it is necessary for a company to hold the mineral rights for an entire drilling unit (DU). A drilling unit for unconventional shale is often 640 acres. If they have a majority (I don't know the specifics) of a DU they can force pool "holdouts" to lease and become part of the drilling unit. So that is why ALL acreage is generally needed.

Now regarding why $20,000 an acre. well it can occur but these lease amounts are rare. During the boom in Texas in 2008 some leaf amounts reached $27k if I remember right - but also many leases at that level collapsed/cancelled right along with the economy and were'n't paid.

So it isn't uncommon to see leases for $40 and up. These days, more likely to be $200 and up and if in a hot area then $1,500 - $3,500 per acre isn't unheard of. When to pull the trigger and lease is the question, do you accept $50, 200, 1,000 or wait, granted someday that mineral acreage might have $5,000/ac value. or you got bypassed and a well is near you and making your land/minerals - not needed. It is like playing poker kind of. but in this case you get to go to the Internet and ask questions and you get to drive down the road and ask your neighbor about going rates (what is everyone hearing).

One final point, why a lot of money for a single acre or small parcel? - this can happen if there is a mineral owner that doesn't want to lease and the lessee might offer them more to make the deal. On the other hand if they don't make the deal (at an although higher offer, not astronomical) then the lessee can force pool.

This doesn't matter whether in Texas - it applies universally.

Wilson

Tommie, they need 100% of the drilling unit which may be 640 acres (they can either do voluntary leases or forced pooling to acquire 100%). All states have regulations that prevent leasing the acreage and leaving a holdout in the middle of the DU that is unleased (doughnut hole they call it). So suddenly all the acreage matters. So the well doesn't have to be on your property or even within sight, but if you are part of the DU then you'll be getting royalties if they ever successfully drill. so your share would be (with a 640 acre DU for example); 6/640 x whatever royalty share they offered you; say 15% = you'd have a .14% interest in the well's production. now that doesn't seem like much, but it adds up. someone will have to verify my assumptions and math here.

Tommie Blankenship said:


Thanks Wilson

Not even close to 20k - my offer is $150. I just couldn't figure out why they even want my 6 acres. Looks like they would lease the big partials and say the hell with messing with these little pieces. It makes sense, if they need a certain percentage of the 640 to be able to drill.

Thanks again for your help


Wilsontownship said:

Tommie,

here are a few of my thoughts. By the way, were you offered $20,000/ac and trying to understand your good fortune? Or your neighbor was and you are trying to understand why you got gipped, or you've read stories of large lease numbers and you are holding out for the big score?.........lol.... anyway,

If they truly can't secure ANY acreage around them, then I agree with you; what's the point, no purpose. However, I doubt that would really be the case, that is, it is likely they have other properties either adjacent or nearby. In general, it is necessary for a company to hold the mineral rights for an entire drilling unit (DU). A drilling unit for unconventional shale is often 640 acres. If they have a majority (I don't know the specifics) of a DU they can force pool "holdouts" to lease and become part of the drilling unit. So that is why ALL acreage is generally needed.

Now regarding why $20,000 an acre. well it can occur but these lease amounts are rare. During the boom in Texas in 2008 some leaf amounts reached $27k if I remember right - but also many leases at that level collapsed/cancelled right along with the economy and were'n't paid.

So it isn't uncommon to see leases for $40 and up. These days, more likely to be $200 and up and if in a hot area then $1,500 - $3,500 per acre isn't unheard of. When to pull the trigger and lease is the question, do you accept $50, 200, 1,000 or wait, granted someday that mineral acreage might have $5,000/ac value. or you got bypassed and a well is near you and making your land/minerals - not needed. It is like playing poker kind of. but in this case you get to go to the Internet and ask questions and you get to drive down the road and ask your neighbor about going rates (what is everyone hearing).

One final point, why a lot of money for a single acre or small parcel? - this can happen if there is a mineral owner that doesn't want to lease and the lessee might offer them more to make the deal. On the other hand if they don't make the deal (at an although higher offer, not astronomical) then the lessee can force pool.

This doesn't matter whether in Texas - it applies universally.

Wilson

It all depends on where you are - those huge leasing bonuses of thousands of dollars were cropping up in the Ft. Worth/Arlington area in residential areas - while the acre might have leased for $20K, that amount was divided up between the homeowners within that area - for instance, I know of one person who was in a situation like that and his part was just a fraction and not much money at all - it sounds much better than it is.

Dear Wilson,

I must disagree on most levels and hate to come across as a pedagogue, but our law is one of a pendant and bad information is worse than none at all.

"Tommie, they need 100% of the drilling unit which may be 640 acres (they can either do voluntary leases or forced pooling to acquire 100%).

NOT ACCURATE

All states have regulations that prevent leasing the acreage and leaving a holdout in the middle of the DU that is unleased (doughnut hole they call it).

NOT ACCURATE

So suddenly all the acreage matters. So the well doesn't have to be on your property or even within sight, but if you are part of the DU then you'll be getting royalties if they ever successfully drill.

NOT ACCURATE, unless wellbore path cuts your minerals.

Tommy's land is in Texas.

There are no regulations in Texas as to the creation of units with unleased doughnuts. Also, forced pooling in Texas is for all intents and purposes, non-existent. Typical drilling units in Texas are 40 acres for conventional drilling. Let us suppose that they formed the 40 acre DU with a 34 acre tract and a 6 acre tract. Assume that the wellbore is going to be on the 34 acre tract. They have 1/2 leased under the 6 acre tract. The open 1/2 under the 6 acre tract gets nothing unless he voluntarily pools his interest. AND the first operator to designate the 40 with the open 3 acres, assigns the open 3 acres to establish that the applicant has sufficient unassigned acreage to satisfy the density requirement. The designation of a drilling unit has no title significance;

Where it would really matter is where the wellbore path is located and if there is sufficient open acreage to allow competing operators to fit in a well of their own after production is established. This is true whether the wellbore path cuts an open tract through conventional or unconventional drilling.

Sadly, there is no equitable pooling in Texas.

In Texas, Wilson, you might want to read the following:

http://www.mineralrightsforum.com/profiles/blogs/the-basics-of-pool...


Wilsontownship said:

Tommie, they need 100% of the drilling unit which may be 640 acres (they can either do voluntary leases or forced pooling to acquire 100%). All states have regulations that prevent leasing the acreage and leaving a holdout in the middle of the DU that is unleased (doughnut hole they call it). So suddenly all the acreage matters. So the well doesn't have to be on your property or even within sight, but if you are part of the DU then you'll be getting royalties if they ever successfully drill. so your share would be (with a 640 acre DU for example); 6/640 x whatever royalty share they offered you; say 15% = you'd have a .14% interest in the well's production. now that doesn't seem like much, but it adds up. someone will have to verify my assumptions and math here.

Tommie Blankenship said:


Thanks Wilson

Not even close to 20k - my offer is $150. I just couldn't figure out why they even want my 6 acres. Looks like they would lease the big partials and say the hell with messing with these little pieces. It makes sense, if they need a certain percentage of the 640 to be able to drill.

Thanks again for your help

Hi Buddy,

Thanks for your thorough correction. I apologize to Tommie and other readers for my sweeping assumptions. My experience comes from Michigan and I think I have correctly explained how it works there. Otherwise, just a lot of reading on websites like this, so I need to be careful about some things (such as this topic) when posting. Thanks again.

Now, let me explore more about texas regs.

  1. So it is possible to be in a drilling unit and not get any royalties?
  2. It is possible for a drilling unit to be formed around unleased land which could lock them out of any future opportunities?
  3. You mention the 40 ac DU for conventional drilling; seems everything I have read talks about the explosion in unconventional shale exploration, isn't that the case in Texas?
  4. What size is a DU for unconventional drilling in Texas? I understand that it is typically 640 acres or even more, the way I interpret how Texas works, wouldn't that leave a lot of mineral owners in the DU out of the royalty stream?

Might as well turn this post into a tutorial. Thanks.

Wilson


Buddy Cotten said:

Dear Wilson,

I must disagree on most levels and hate to come across as a pedagogue, but our law is one of a pendant and bad information is worse than none at all.

"Tommie, they need 100% of the drilling unit which may be 640 acres (they can either do voluntary leases or forced pooling to acquire 100%).

NOT ACCURATE

All states have regulations that prevent leasing the acreage and leaving a holdout in the middle of the DU that is unleased (doughnut hole they call it).

NOT ACCURATE

So suddenly all the acreage matters. So the well doesn't have to be on your property or even within sight, but if you are part of the DU then you'll be getting royalties if they ever successfully drill.

NOT ACCURATE, unless wellbore path cuts your minerals.

Tommy's land is in Texas.

There are no regulations in Texas as to the creation of units with unleased doughnuts. Also, forced pooling in Texas is for all intents and purposes, non-existent. Typical drilling units in Texas are 40 acres for conventional drilling. Let us suppose that they formed the 40 acre DU with a 34 acre tract and a 6 acre tract. Assume that the wellbore is going to be on the 34 acre tract. They have 1/2 leased under the 6 acre tract. The open 1/2 under the 6 acre tract gets nothing unless he voluntarily pools his interest. AND the first operator to designate the 40 with the open 3 acres, assigns the open 3 acres to establish that the applicant has sufficient unassigned acreage to satisfy the density requirement. The designation of a drilling unit has no title significance;

Where it would really matter is where the wellbore path is located and if there is sufficient open acreage to allow competing operators to fit in a well of their own after production is established. This is true whether the wellbore path cuts an open tract through conventional or unconventional drilling.

Sadly, there is no equitable pooling in Texas.

In Texas, Wilson, you might want to read the following:

http://www.mineralrightsforum.com/profiles/blogs/the-basics-of-pool...

Best,

Buddy Cotten

Mineral Manager



Wilsontownship said:

Tommie, they need 100% of the drilling unit which may be 640 acres (they can either do voluntary leases or forced pooling to acquire 100%). All states have regulations that prevent leasing the acreage and leaving a holdout in the middle of the DU that is unleased (doughnut hole they call it). So suddenly all the acreage matters. So the well doesn't have to be on your property or even within sight, but if you are part of the DU then you'll be getting royalties if they ever successfully drill. so your share would be (with a 640 acre DU for example); 6/640 x whatever royalty share they offered you; say 15% = you'd have a .14% interest in the well's production. now that doesn't seem like much, but it adds up. someone will have to verify my assumptions and math here.

Tommie Blankenship said:


Thanks Wilson

Not even close to 20k - my offer is $150. I just couldn't figure out why they even want my 6 acres. Looks like they would lease the big partials and say the hell with messing with these little pieces. It makes sense, if they need a certain percentage of the 640 to be able to drill.

Thanks again for your help


Thanks Buddy!

It's amazing that I have search everywhere for this simple explanation and have found nothing but bits and pieces that just confuse you more.

Your answer wasn't what I wanted to hear, but it's what I was expecting.

Thanks again Buddy and Wilson for your help.

Thanks Buddy -- great info!

Dear Wilson,

If you go to my pooling blogs, you should have a good understanding of Texas pooling and unitization. Contrary to popular belief, Texas is not just one big horizontal play. There are plenty of conventional wells drilled. Check out Statewide Rule 86 (16 TAC § 3.86) for horizontal drainhole rules and regulations.

But remember, it is generally the lease that controls.

Tommie,

In addition to the sage remarks posted, there is the economic reason for the operator, ready to drill a well, but finds thru legal title searches that a small acreage is outstanding and elects to make an offer to avoid the legal expense of hearings to get a permit. Final permit hearings can be very expensive to the operator and delay exploration.

Mr Kennedy's explanation is the most common in my experience however.



Thanks Gary